Today we are going to look at Catering International & Services Société Anonyme (EPA:CTRG) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Catering International & Services Société Anonyme:
0.14 = €9.8m ÷ (€129m - €57m) (Based on the trailing twelve months to December 2018.)
So, Catering International & Services Société Anonyme has an ROCE of 14%.
Is Catering International & Services Société Anonyme's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Catering International & Services Société Anonyme's ROCE is meaningfully better than the 7.4% average in the Commercial Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Catering International & Services Société Anonyme's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can click on the image below to see (in greater detail) how Catering International & Services Société Anonyme's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Catering International & Services Société Anonyme's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Catering International & Services Société Anonyme has total assets of €129m and current liabilities of €57m. Therefore its current liabilities are equivalent to approximately 44% of its total assets. Catering International & Services Société Anonyme has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From Catering International & Services Société Anonyme's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Catering International & Services Société Anonyme shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.